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Capital Goods Scheme – Main Provisions

1. What is the Capital Goods Scheme?
2. How does the scheme operate?
3. When does the scheme apply?
4. When does the scheme not apply?
5. 'VAT-Life' (adjustment period) of a capital good
6. Intervals
7. Obligations at the end of the Initial Interval
8. Second and subsequent intervals
9. Adjustment where property use is linked to overheads
10. 'Big-Swing' in taxable use
11. Development by the tenant
12. Obligations - the 'capital good record'

1. What is the Capital Goods Scheme?

The Capital Goods Scheme (CGS) is a mechanism for regulating deductibility over the 'VAT-life' of a capital good. For VAT purposes a capital good is a developed property. The scheme operates by ensuring that the deductibility for a property reflects the use to which the property is put over the VAT-life (adjustment period) of the property. The CGS is provided for in Chapter 2 of Part 8 VATCA 2010. A feature of the scheme is a number of definitions, such as, initial interval, adjustment period, etc. These definitions reflect the various component parts of the scheme.

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2. How does the scheme operate?

The VAT incurred on the acquisition or development of a property is deductible in accordance with the normal rules relating to deductibility. A person who is engaged in fully taxable economic activities is entitled to deduct all of the VAT charged on the acquisition or development of a property to be used in the business. A person who is engaged in partly taxable and partly exempt economic activities is only entitled to deduct the percentage of VAT charged that corresponds to the percentage of taxable use. It is important to note that the entitlement to deduct VAT is determined by Chapter 1 of Part 8 VATCA 2010 and is independent of the CGS. The CGS is a mechanism for adjusting deductibility, not in determining entitlement to deductibility.

At the end of the first twelve months following completion (or acquisition, where the property is acquired following completion), the taxpayer must review the amount of VAT deducted on the acquisition or development of the property. If the proportion of taxable use of a property during that twelve month period differs from the proportion of the VAT deducted on the acquisition or development of that property, then an adjustment is required. If too much VAT has been deducted, the taxpayer must pay back the excess. If too little VAT has been deducted initially, the taxpayer is entitled to claim the deficiency as an input credit.

The first twelve months mentioned above is known as the 'initial interval'.

This adjusted amount deductible for the first twelve months is the benchmark figure for comparison purposes under the scheme for the remainder of the VAT-life of the property. The scheme requires an annual review, over the VAT-life of the property by the owner of the property, of the use to which a property is put (in terms of taxable or exempt use). Where there is a change in the proportion of use for taxable purposes for any year in comparison with the use during the initial 12 months, an adjustment of a proportion of the VAT deductibility will be required.

The annual adjustments will reflect the difference between the use in the initial twelve months and the use in the year being reviewed. Ultimately, the proportion of VAT deducted following all annual adjustments will reflect the actual use of the property over the adjustment period or VAT-life of the property. The VAT-life of a property is made up of twenty intervals. In the case of a refurbishment the VAT-life is ten intervals. Except in relation to the second CGS interval, a CGS interval is twelve months.

It is important to note that for the majority of businesses these CGS reviews will have no effect. For example, if a company deducts all of the VAT charged on acquisition or development and uses the property for wholly taxable activities during the adjustment period then no adjustments will arise.

Figure 1 outlines how the scheme operates. It assumes that -

• the capital good (developed property) is acquired on or after 1 July 2008 with VAT being chargeable on the acquisition,
• the person acquiring the property is engaged in an economic activity, and
• the accounting year for that person ends on 31 December each year.

The dates when each interval ends are discussed and explained below. Figure 1 can be used as a simple guide to determine whether or not an adjustment is required at the end of any interval during the 'adjustment period'.

Figure 1 - Basics of the scheme

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3. When does the scheme apply? (Section 63(2))

The scheme applies to developed immovable goods (properties) on the acquisition or development of which VAT has been charged to a 'taxable person', i.e. a person that is engaging in an economic activity. In other words, to be subject to the scheme the owner of the property must have been charged VAT on the acquisition or development of the property and must be in business. Any person who acquires or develops a property in these circumstances is known as a 'capital goods owner' and will be referred to, for the purpose of this guide, as the owner.

Sections 95 (12)(a) and 95 (12) (b) of the VATCA 2010 confirm that the CGS applies to transitional properties and the owner of such property is a capital good owner.

However, in the application of CGS to immovable goods and interests in immovable goods that are transitional properties, certain elements of the CGS are disregarded in respect of the person who owns those immovable goods or holds an interest in those immovable goods on 1 July 2008. These elements are the interval-based adjustments, the big swing rule (but see below) and the opportunity for a landlord to claim a credit for residual VAT when he exercises an option to tax a letting of a property that had previously been exempt.

If a development is completed on or after 1 July 2008 and it is a " refurbishment" within the meaning of Section 63 VATCA 2010, then these elements of the CGS mentioned above are not disregarded in respect of that refurbishment.

Where on or after 23 February 2010 a transitional property is used for the first time, or there is a change of use in the property, the big-swing test (Section 64 (4)(a)) will apply to such properties. This means that the owner of such a property will be obliged to make a big-swing adjustment if the first use or the changed use of that property results in a "swing" of more than fifty percentage points. See "Big-swing" rule for Transitional Properties for further information.

Where a transitional property is supplied within the VAT-life of the property, the CGS adjustments relating to supplies apply to that transaction. If such a property is sold and the sale is exempt from VAT, the claw-back provisions of the CGS in relation to exempt supplies apply. If such a property is sold and the sale is taxable, the additional input credit provisions of the CGS in relation to taxable supplies apply.

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4. When does the scheme not apply?

The scheme does not apply to any person who acquires a property on which VAT is not chargeable. It also does not apply to persons who are not engaged in economic (business) activities or to a taxable person who acquires or develops a property in a non-business capacity. In other words, private individuals and bodies who engage in activities that are outside the scope of VAT are not subject to the scheme. This is because private individuals and bodies that engage in outside the scope activities are not considered taxable persons.

Sections 95 (12)(a) and 95 (12) (b) VATCA 2010 confirm that the CGS applies to transitional properties and the owner of such property is a capital good owner. However, in the application of CGS transitional properties, certain elements of the CGS are disregarded, as explained above.

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5. 'VAT-Life' (adjustment period) of a capital good (Section 64(1))

The adjustment period for transitional freehold properties and legacy leases is set out at Treatment of Transitional Properties and Legacy Leases, paragraph 6 and paragraph 11.

For properties acquired or developed after 1 July 2008, the scheme provides that in most cases each capital good will have a VAT-life or adjustment period of twenty intervals. It is during this period that adjustments are required to be made. Once the period has elapsed, there are no further obligations under the scheme.

Certain properties have an adjustment period of ten intervals. Where development work is carried out on a previously completed building a new capital good to the value of the cost of the development is 'created' by this development work. This is known as a 'refurbishment'. The adjustment period for a refurbishment is ten intervals. This means that there can, in some cases, be two or more capital goods in relation to a single property at one time.

A person who owns a freehold or a freehold equivalent interest in a building or a tenant who has a lease in a building can 'create' a refurbishment (capital good) by carrying out development work on a previously completed building.

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6. Intervals (Section 63)

The adjustment period is divided up into intervals. There are twenty intervals in the case of a new capital good and ten in the case of a refurbishment. An interval, other than the 'initial interval' and 'second interval', will be the owner's accounting year.

In the case of an owner who constructs a property, the initial interval begins on the date on which a property is completed [1]. In the case of an owner who purchases a property the initial interval begins on the date the property is purchased. In both cases the initial interval ends twelve months from those dates.

The 'second interval' begins on the day after the initial interval ends and ends at the end of the owner's accounting year in which the initial interval ends. The purpose of this shorter interval is to align the adjustments that may be required under the scheme with the owner's accounting year.

'Subsequent interval' means each interval after the second interval until the end of the adjustment period. The interval immediately following the second interval begins on the day after the end of the second interval and ends at the end of the owner's accounting year.

Table 1 below illustrates when each interval will begin and end for a new capital good and for a refurbishment where the capital good is acquired on 13/9/2010 and a refurbishment is carried out on the property during 2023 that is completed on 31/7/2023.

[1] For information on what constitutes 'completed' please see The Supply of Property - New System of this guide.

[2] This means the property is a 'capital good' for the purposes of the scheme.

Table 1 - Illustration of dates for adjustment period

20 Intervals - New Capital Good

Interval	Begins	Ends
1	13/09/2010	12/09/2011
2	13/09/2011	31/12/2011
3	01/01/2012	31/12/2012
4	01/01/2013	31/12/2013
5	01/01/2014	31/12/2014
...	...	...
...	...	...
...	...	...
17	01/01/2026	31/12/2026
18	01/01/2027	31/12/2027
19	01/01/2028	31/12/2028
20	01/01/2029	31/12/2029

10 Intervals - Refurbishment

Interval	Begins	Ends
1	31/07/2023	30/07/2024
2	31/07/2024	31/12/2024
3	01/01/2025	31/12/2025
4	01/01/2026	31/12/2026
5	01/01/2027	31/12/2027
6	01/01/2028	31/12/2028
7	01/01/2029	31/12/2029
8	01/01/2030	31/12/2030
9	01/01/2031	31/12/2031
10	01/01/2032	31/12/2032

Note
Interval 1 = 'initial interval',
Interval 2 = 'second interval',
Intervals 3-20 = 'subsequent intervals'.

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Paragraphs 7 and 8 do not apply to transitional properties or legacy leases. For the CGS treatment of such properties and leases see Transitional Measures

7. Obligations at the end of the Initial Interval (Section 64(2))

As illustrated above in Table 1 the initial interval for a capital good runs for a full twelve-month period. At the end of this period the owner must examine the use to which the property was put during that twelve months. 'Use' in this context means the taxable or exempt use of the property. This percentage of taxable use will usually be readily identifiable by the owner as it is based directly on the use of the property. However, in some cases a property may be used as a headquarters of a business that is engaged in various taxable and exempt activities. In these cases, the percentage of taxable use will depend on the overall mix of taxable and exempt activities carried on by the business.

Where the percentage of taxable use during the first year differs from the percentage of the VAT deducted by the owner on the acquisition or development of the property, then an adjustment is required. If the percentage of taxable use for the initial interval is less than the percentage of the VAT deducted on the acquisition or development of the property, VAT is payable by the owner. If the percentage of taxable use for the initial interval is greater than the percentage of the VAT deducted on the acquisition or development of the property, then the owner is entitled to additional deductible VAT. Clearly, if the owner deducts all of the VAT and uses the property for fully taxable purposes, there is no adjustment required. Examples 4 and 5 below illustrate how these rules work in practice.

Note - There is an exception to the normal rules at the end of the initial interval. If a property developer rents out residential properties (exempt activity - option to tax rents not allowed), then there is no obligation to carry out the adjustment at the end of the initial interval. For full details of these rules please refer to the Article which deals with this subject in Tax Briefing 69 .

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8. Second and subsequent intervals (Section 64(3))

At the end of the second and each subsequent interval the owner should examine the use to which the property is put during that interval and compare that use with the use to which the property was put during the initial interval.

Where the percentage of taxable use during the interval in question differs from the percentage of taxable use for the initial interval, then an adjustment is required.

If the percentage of taxable use for the interval is less than the percentage of taxable use for the initial interval then an additional amount of VAT is payable by the owner. If the percentage of taxable use for the interval is greater than the percentage of taxable use for the initial interval, then the owner is entitled to an additional VAT deduction. Of course, if the percentage of taxable use for the interval is the same as the percentage of taxable use for the initial interval, no adjustment is required.

The adjustments at the end of the second and each subsequent interval are calculated using certain defined terms (see Section 63 VATCA 2010).

• The 'base tax amount' is calculated by dividing the 'total tax incurred' by the number of intervals in the adjustment period.
• The 'reference deduction amount' is calculated by dividing the 'total reviewed deductible amount' by the number of intervals in the adjustment period. This amount is treated as if it were the amount that was deducted by the owner at the beginning of the second and each subsequent interval.
• The 'interval deductible amount' is the amount of the 'base tax amount' that is deductible on the basis of the use in the interval in question (i.e. the second or subsequent interval). For example if the 'proportion of deductible use' for the second interval is 70%, then the 'interval deductible amount' is calculated by multiplying the 'base tax amount' by 70%.

Example 6 below illustrates all of these concepts.

As can be seen from Example 6, the scheme ensures that the total deductibility allowable in respect of the property reflects the use to which the property is put over the adjustment period. Table 2 & 3 below illustrates how the figures from Example 6 lead to adjustments at the end of the initial interval (based on the full amount of VAT incurred) as well as the 6th, 7th, and 10th interval based on 1/20th of the VAT incurred.

Table 2 - Adjustments for Intervals

Interval	Amt Deducted €	Total Rev Ded Amt €	Adjustment €	VAT
1	1,350,000	1,080,000	270,000	Payable

Base tax amount = €67,500 for all intervals

Table 3 - Adjustments for Intervals

Interval	Ref Deduction Amt €	Interval Deduction Amt €	Adjustment €	VAT
2	54,000	54,000	-	-
3	54,000	54,000	-	-
4	54,000	54,000	-	-
5	54,000	54,000	-	-
6	54,000	47,250	6,750	Payable
7	54,000	47,250	6,750	Payable
8	54,000	54,000	-	-
9	54,000	54,000	-	-
10	54,000	64,125	-10,125	Deductible
11	54,000	54,000	-	-
12	54,000	54,000	-	-
13	54,000	54,000	-	-
14	54,000	54,000	-	-
15	54,000	54,000	-	-
16	54,000	54,000	-	-
17	54,000	54,000	-	-
18	54,000	54,000	-	-
19	54,000	54,000	-	-
20	54,000	54,000	-	-

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9. Adjustment where property use is linked to overheads

In the majority of cases the taxable use of a property will be determined by direct attribution, i.e. the actual use to which the property is put. In such cases the adjustment must be made at the end of the appropriate interval and any tax payable or deductible must be accounted for in the VAT return for the taxable period following the end of that interval. However, in the case of a building that is, for example, a headquarters, and where the taxable use of the property is determined using the same methodology as used for the deductibility of general overheads of the business, Revenue will allow the adjustment to be made in any of the three taxable periods following the end of the relevant interval. This concurs with the timescale Revenue allows for adjustments arising from reviews of apportionment of input credits in accordance with Regulation 17(3) of Value-Added Tax Regulations, 2010 (S.I. No. 639 of 2010). It should be noted that, if a taxpayer attempts to abuse these rules for the purpose of avoidance or deferral of tax, the treatment may be withdrawn for that taxpayer at the discretion of Revenue.

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10. 'Big-Swing' in taxable use (Section 64(4))

For the 'big-swing' rules for transitional properties see Transitional Measures.

So far, this Section has outlined the rules for the adjustments at the end of an interval where there is a change in the taxable use of a property when compared with the taxable use during the initial interval. Such adjustments are based on 1/20th (1/10th in the case of refurbishment) of the VAT incurred on the capital good.

There are special rules that apply where the taxable use for an interval differs by more than fifty percentage points from the taxable use for the initial interval. These rules recognise the fact that there has been a significant change in the taxable activities of the business and require a full adjustment. This adjustment is not based on 1/20th of the VAT incurred but is based on the full VAT incurred reduced by the number of intervals that have already expired in the adjustment period.

The big-swing rule operates by providing for an adjustment at the end of an interval where there has been a change of more than fifty percentage points when compared to the initial interval. This adjustment is based on the full amount of VAT deducted for the initial interval (as opposed to 1/20 under the normal rules). Where such an adjustment is required there is a 're-balancing' of the benchmark figures and the re-balanced benchmark figures are then used for all remaining intervals after the interval in which the big-swing occurs.

Example 7 illustrates how adjustments are calculated when there is a change of more than fifty percentage points in the proportion of taxable use of the property when compared with the use during the initial interval. In that particular example, the use increased by more than fifty percentage points so there was a VAT credit given. The rule also applies where there is a decrease in the taxable use by more than fifty percentage points. The decrease results in a claw-back of VAT. The benchmark figures are re-balanced.

[3] The 2nd interval ends on the date of the end of the next accounting year which in this example is 31/3/2013 as the accounting year of C Ltd ends on 31/3 each year.

[4] When such an adjustment occurs, there is no 'normal' adjustment as described in paragraph 6 based on 1/20 of the deductibility.

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11. Development by the tenant (Section 64(7))

Where a tenant has a leasehold interest in a completed property and carries out development work on that property then the tenant 'creates' a capital good. The tenant is regarded as the owner of this capital good. This development is a refurbishment and the adjustment period is ten years. All of the obligations in relation to the initial, second and subsequent intervals above arise for the tenant in relation to the development work carried out. Any change in use must be adjusted for over the adjustment period, which is ten intervals. There are obligations on the tenant if the lease is assigned or surrendered during the adjustment period for the refurbishment (see CGS Other Adjustments, paragraph 7). The 'normal' annual adjustment (based on 1/20) provisions in the CGS and the CGS provisions relating to the landlord’s option to tax do not apply to refurbishments which were completed prior to 1 July 2008.

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12. Obligations in relation to the 'capital good record' (Section 64(12) and Regulation 27(1)(v)VAT Regulations 2010)

Every owner is obliged to create and maintain a 'capital good record' for each property [5] they own. The record must contain the following information about the property -

• The amount of VAT charged in relation to the owner's acquisition or development of the property. (This is known as the 'total tax incurred'. See examples above).
• The amount of the VAT charged that was deducted initially.
• The date on which the adjustment period begins (date of acquisition, where the property was acquired or date of completion of development where property was constructed or refurbished).
• The number of intervals in the adjustment period. This may be 10 or 20 depending on the situation.
• The Initial Interval proportion of deductible use, i.e. the percentage of taxable use for the first 12 months. (See examples above).
• The total reviewed deductible amount, i.e. total tax incurred multiplied by the percentage of taxable use for the initial interval. (See examples above).
• The proportion of deductible use for each interval, i.e. the percentage of taxable use for each interval (second, third, fourth, etc).
• Details of any adjustments under the scheme. (See examples above).
• Details of any sale of the property.

Failure to create and maintain a capital good record for each capital good is liable to a penalty in accordance with Section 115(1) VATCA 2010.

[5] In the case of a property that has been refurbished there may be two or more capital goods attributable to that property. A 'capital good record' must be created and maintained for all capital goods that a taxpayer has.

Updated: September 2011

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